Srorm Software wants to issue $110 million ($1,100 x 100,000 bonds) in new capit
ID: 2750648 • Letter: S
Question
Srorm Software wants to issue $110 million ($1,100 x 100,000 bonds) in new capital to fund new opportunities. If Storm raised the $110 million of new capital in a straight-debt 20-year bond offering, Storm would have to offer an annual coupon rate of 12%. However, Storm's advisers have suggested a 20-year bond offering with warrants. According to the advisers, Storm could issue 10% annual coupon-bearing debt with 24 warrants per $1,100 face value bond. Storm has 10 million shares of stock outstanding at a current price of $20. The warrants can be exercised in 10 years (on December 31, 2025) at an exercise price of $25. Each warrant entitles its holder to buy one share of Storm Software stock. After issuing the bonds with warrants, Storm's operations and investments are expected to grow at a constant rate of 11.2% per year.
a.)If investors pay $1,100 for each bond, what is the value of each warrant attached to the bond issue________? Round your answer to the nearest cent.
b.)What is the component cost of these bonds with warrants________? Round your answer to two decimal places.
What premium is associated with the warrants________? Round your answer to two decimal places.
Explanation / Answer
a.)If investors pay $1,100 for each bond, what is the value of each warrant attached to the bond issue________? Round your answer to the nearest cent.
No of warrants on a bond of 1100 = 24
Value of warrant = one share of company = 25
value of bond = 24*25 = 600
Value of warrant in percentage = (600/1100)*100 = 54.54
b.)What is the component cost of these bonds with warrants________? Round your answer to two decimal places.
No of warrants on a bond of 1100 = 24
cost of warrant = one share of company = 20
cost of bond = 24*20 = 480
cost of warrant in pecentage = (480/1100)*100 = 43.63
3- What premium is associated with the warrants________? Round your answer to two decimal places.
Value of warrant in percentage = (600/1100)*100 = 54.54 - cost of warrant in pecentage = (480/1100)*100 = 43.63 = 10.90
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